<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 1996
Page
Table of Contents Number
Part I. Financial Information:
Financial Highlights..............................................3
Report of Independent Public Accountants..........................4
Item 1. Financial Statements:
Condensed Consolidated Financial Statements................5 - 8
Notes to Condensed Consolidated Financial Statements......9 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................15 - 23
Part II. Other Information:
Item 1. Legal Proceedings......................................none
Item 2. Changes in Securities..................................none
Item 3. Defaults Upon Senior Securities........................none
Item 4. Submission of Matters to a Vote of Security Holders....none
Item 5. Other Information......................................none
Item 6. Exhibits and Reports on Form 8-K.........................24
Signatures.................................................................24
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<PAGE>
PART I. FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
First Quarter
------------------------ Percent
1996 1995 Change
---------- --------- ------
Net income........................... $ 38,128 $ 32,766 16.4 %
Per share:
Primary earnings................... $ 1.28 $ 1.09 17.4 %
Fully diluted earnings............. 1.28 1.09 17.4
Common stock dividends declared.... 0.47 0.40 17.5
Preferred dividends declared....... 1.50 1.50 --
Book value per common share........ 27.63 24.99 10.6
Market value per common share...... 64.50 41.88 54.0
Average balances:
Total assets....................... $ 9,599,035 $ 9,373,733 2.4 %
Earning assets..................... 8,663,462 8,582,895 0.9
Loans, net of unearned interest.... 6,986,180 6,330,127 10.4
Deposits........................... 7,624,185 7,228,516 5.5
Shareholders' equity............... 818,169 745,915 9.7
Ratios:
Return on average assets........... 1.60 % 1.42 %
Return on average equity........... 18.74 17.81
Average shareholders' equity
to average assets................ 8.52 7.96
Risk-based capital ratios:
Tier 1........................... 7.82 8.78
Total............................ 11.03 12.23
Leverage........................... 6.36 6.44
Net interest margin................ 4.58 4.27
Noninterest expense to net revenue. 51.86 55.75
Noninterest income as a percent
of net revenue................... 28.63 26.61
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<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of Star Banc Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
STAR BANC CORPORATION (an Ohio corporation) as of March 31, 1996, and the
related condensed consolidated statements of income, changes in shareholders'
equity, and cash flows for the three-month periods ended March 31, 1996 and
1995. These financial statements are the responsibility of the Corporation's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Star Banc Corporation
as of December 31, 1995 (not presented herein), and, in our report dated
January 10, 1996, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
April 9, 1996
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<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS:
Cash and Due From Banks................................. $ 428,302 $ 463,693
Interest Bearing Deposits in Banks...................... 100 100
Federal Funds Sold and Securities Purchased
Under Agreements to Resell............................ 11,990 22,400
Investment Securities:
Available-for-Sale.................................... 1,421,972 1,517,868
Held-to-Maturity (market value of $182,956 at March
31, 1996 and $186,064 at December 31, 1995)......... 182,771 184,687
Total Securities...................................... 1,604,743 1,702,555
Loans:
Commercial Loans...................................... 2,322,896 2,234,847
Real Estate Loans..................................... 2,592,584 2,576,186
Retail Loans.......................................... 2,291,271 2,213,036
Total Loans......................................... 7,206,751 7,024,069
Less: Unearned Interest............................. 100,669 98,288
7,106,082 6,925,781
Allowance for Loan Losses..................... 109,416 106,909
Net Loans........................................... 6,996,666 6,818,872
Premises and Equipment.................................. 134,194 134,386
Acceptances - Customers' Liability...................... 19,523 20,965
Other Assets............................................ 413,987 410,361
Total Assets........................................ $ 9,609,505 $ 9,573,332
LIABILITIES:
Deposits:
Noninterest-Bearing Deposits.......................... $ 1,365,240 $ 1,371,888
Interest-Bearing Deposits:
Savings and NOW..................................... 2,004,979 2,014,356
Time Deposits $100,000 and Over..................... 419,614 453,936
All Other Deposits.................................. 3,863,262 3,853,818
Total Deposits.................................... 7,653,095 7,693,998
Short-term Borrowings................................... 818,601 735,016
Long-term Debt.......................................... 161,239 161,190
Acceptances Outstanding................................. 19,523 20,965
Other Liabilities....................................... 141,470 141,986
Total Liabilities................................... 8,793,928 8,753,155
SHAREHOLDERS' EQUITY:
Preferred Stock:
Shares Authorized - 1,000,000
Shares Outstanding - 3,387 at March 31, 1996
and 3,387 at December 31, 1995...................... 281 281
Common Stock:
Shares Authorized - 100,000,000
Shares Issued - 30,160,458 at March 31, 1996
and 30,160,458 at December 31, 1995................. 150,802 150,802
Surplus................................................. 76,651 76,937
Retained Earnings....................................... 623,241 599,005
Treasury Stock, at cost - 649,302 shares at March
31, 1996 and 326,870 at December 31, 1995............. (33,160) (12,805)
Net Unrealized Gain/(Loss) on Securities................ (2,238) 5,957
Total Shareholders' Equity.......................... 815,577 820,177
Total Liabilities and Shareholders' Equity.......... $ 9,609,505 $ 9,573,332
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
(Dollars in thousands except per share data)
First Quarter
1996 1995
INTEREST INCOME:
Interest and Fees on Loans................... $152,157 $135,701
Interest on Investment Securities:
Taxable.................................... 25,586 34,948
Non-Taxable................................ 720 186
Interest on Federal Funds Sold and
Securities Purchased Under
Agreements to Resell....................... 221 355
Interest on Interest-Bearing Deposits........ 1 1
Total Interest Income...................... 178,685 171,191
INTEREST EXPENSE:
Interest on Savings and NOW.................. 10,942 10,814
Interest on Time Deposits $100,000 and Over.. 6,072 8,449
Interest on Other Deposits................... 50,105 43,474
Interest on Short-Term Borrowings............ 10,434 15,164
Interest on Long-Term Debt................... 2,759 2,542
Total Interest Expense..................... 80,312 80,443
Net Interest Income...................... 98,373 90,748
Provision for Loan Losses.................... 8,823 5,229
Net Interest Income after
Provision for Loan Losses.............. 89,550 85,519
NONINTEREST INCOME:
Trust Income................................. 11,179 9,735
Service Charges on Deposits.................. 13,134 10,438
Other Service Charges and Fees............... 11,184 9,017
Investment Securities Gains-Net.............. -- 1,282
All Other Income............................. 4,294 2,722
Total Noninterest Income................... 39,791 33,194
NONINTEREST EXPENSE:
Salaries..................................... 29,949 27,105
Pension and Other Employee Benefits.......... 4,945 5,741
Equipment Expense............................ 4,141 3,806
Occupancy Expense - Net...................... 5,056 5,135
All Other Expense............................ 27,999 27,768
Total Noninterest Expense.................. 72,090 69,555
INCOME BEFORE TAX............................ 57,251 49,158
Income Tax................................... 19,123 16,392
NET INCOME................................... $ 38,128 $ 32,766
PER SHARE:
Primary Earnings............................. $ 1.28 $ 1.09
Fully Diluted Earnings....................... 1.28 1.09
Common Stock Cash Dividends Declared......... 0.47 0.40
Preferred Stock Cash Dividends Declared...... 1.50 1.50
See Notes to Condensed Consolidated Financial Statements
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<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Series B Unrealized
Preferred Common Retained Treasury Gain/(Loss) Total
Stock Stock Surplus Earnings Stock on Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.....$ 2,466 $ 150,529 $ 78,037 $ 510,268 $ (9,445) $ (13,637) $ 718,218
Net income.................. 32,766 32,766
Cash dividends declared
on common stock........... (11,937) (11,937)
Cash dividends declared
on Series B Preferred
Stock..................... (37) (37)
Issuance of common stock
and treasury shares....... (569) 1,138 569
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued..... (397) (440) 836 (1)
Purchase of treasury
stock..................... (553) (553)
Shares reserved to meet
deferred compensation
obligations............... 567 9 576
Change in net unrealized
gain/(loss) on securities
available for sale........ 8,078 8,078
Balance, March 31, 1995......$ 2,069 $ 150,529 $ 77,595 $ 531,060 $ (8,015) $ (5,559) $ 747,679
Balance, January 1, 1996.....$ 281 $ 150,802 $ 76,937 $ 599,005 $ (12,805) $ 5,957 $ 820,177
Net income.................. 38,128 38,128
Cash dividends declared
on common stock........... (13,887) (13,887)
Cash dividends declared
on Series B Preferred
Stock..................... (5) (5)
Issuance of common stock
and treasury shares....... (1,334) 4,433 3,099
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued..... --
Purchase of treasury
stock..................... (24,686) (24,686)
Shares reserved to meet
deferred compensation
obligations............... 957 (102) 855
Amortization of stock
awards granted............ 91 91
Change in net unrealized
gain/(loss) on securities
available-for-sale........ (8,195) (8,195)
Balance, March 31, 1996......$ 281 $ 150,802 $ 76,651 $ 623,241 $ (33,160) $ (2,238) $ 815,577
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 38,128 $ 32,766
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 9,567 7,754
Provision for loan losses.............................. 8,823 5,229
Provision for deferred taxes........................... 676 10,720
(Gain)/loss on sale of premises and equipment - net.... (57) (95)
(Gain)/loss on sale of securities - net................ - (1,281)
(Gain)/loss on sale of residential real estate loans... (741) 22
Proceeds from sale of mortgage loans .................. 98,905 9,105
Mortgage Loans originated for sale on secondary market. (95,397) (7,994)
Net change in other assets............................. (7,235) (64,263)
Net change in other liabilities........................ 1,275 14,990
Total adjustments.................................... 15,816 (25,813)
Net cash provided by operating activities............ 53,944 6,953
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities.... 9,063 35,268
Proceeds from maturities of available-for-sale securities.. 82,900 82,659
Proceeds from sales of available-for-sale securities....... 5,529 373,759
Purchase of held-to-maturity securities.................... (12,501) -
Purchase of available-for-sale securities.................. (1,466) (3,912)
Net change in loans........................................ (193,923) (205,450)
Proceeds from sales of loans............................... 3,575 3,579
Proceeds from sales of premises and equipment.............. 281 113
Purchase of premises and equipment......................... (3,607) (5,229)
Net cash provided by/(used in) investing activities...... (110,149) 280,787
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits..................................... (40,595) (192,441)
Net change in short-term borrowings........................ 83,585 (209,527)
Proceeds from issuance of common stock..................... 3,099 233
Purchase of treasury stock................................. (24,686) (553)
Conversion of preferred stock.............................. - (1)
Shares reserved to meet deferred compensation obligations.. 946 576
Dividends paid............................................. (11,945) (10,476)
Net cash provided by/(used in) financing activities...... 10,404 (412,189)
Net change in cash and cash equivalents.................... (45,801) (124,449)
Cash and cash equivalents at beginning of year............. 486,193 486,112
Cash and cash equivalents at March 31......................$ 440,392 $ 361,663
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for three months ended March 31 1996 1995
Interest.................................................$ 89,300 $ 77,657
Income Taxes............................................. 255 211
Noncash transfer of loans to other real estate owned....... 121 554
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
These condensed consolidated financial statements have been prepared by Star
Banc Corporation ("the Corporation") pursuant to the rules and regulations of
the Securities and Exchange Commission and, therefore, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. It
is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Corporation's annual
report on Form 10-K for the year ended December 31, 1995, filed with the
Securities and Exchange Commission.
These condensed consolidated financial statements include the accounts of
the Corporation and all of its subsidiaries and reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results for the periods reported. All such adjustments are of a normal
recurring nature.
Note 2. Investment Securities
The following table summarizes unrealized gains and losses for held-to-maturity
and available-for-sale securities at March 31, 1996 and December 31, 1995.
(Dollars are in thousands)
<TABLE>
<CAPTION>
------------March 31, 1996------------ ------------December 31, 1995---------
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ------ ------ -------- --------- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
Mortgage-backed
securities $ 135,779 $ -- $ 1,044 $ 134,735 $ 144,701 $ -- $ 1,118 $ 143,583
Obligations of state and
political subdivisions 46,992 1,233 4 48,221 39,986 2,500 5 42,481
Other debt securities -- -- -- -- -- -- -- --
Total held-to-
maturity securities $ 182,771 $ 1,233 $ 1,048 $ 182,956 $ 184,687 $ 2,500 $ 1,123 $ 186,064
Available-for-Sale
U.S. Treasuries and
agencies $ 16,324 $ 294 $ 14 $ 16,604 $ 18,933 $ 419 $ 4 $ 19,348
Mortgage-backed
securities 1,367,293 10,093 13,824 1,363,562 1,449,217 14,896 6,021 1,458,092
Other debt securities 1,435 7 -- 1,442 1,435 9 1 1,443
Federal Reserve/FHLB
stock and other
equity securities 40,364 -- -- 40,364 38,985 -- -- 38,985
Total available-for-
sale securities $1,425,416 $10,394 $13,838 $1,421,972 $1,508,570 $15,324 $ 6,026 $1,517,868
</TABLE>
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<PAGE>
As of March 31, 1996, the Corporation reported a net unrealized loss of
$3.4 million for available-for-sale securities. For the first three months of
1996, the after-tax net unrealized gain/(loss) reported as a separate component
of equity changed from an unrealized gain of $6.0 million to an unrealized loss
of $2.2 million decreasing shareholders' equity $8.2 million.
The following table presents the amortized cost and fair value of
held-to-maturity and available-for-sale debt securities at March 31, 1996.
(Dollars in thousands)
Amortized Fair
Cost Value
Held-to-Maturity --------- ---------
One year or less $ 54,619 $ 54,584
After one year through five years 95,780 95,582
After five years through ten years 25,628 25,880
After ten years 6,744 6,910
Total $ 182,771 $ 182,956
Available-for-Sale
One year or less $ 383,219 $ 382,304
After one year through five years 801,100 799,042
After five years through ten years 156,688 156,298
After ten years 44,045 43,964
Total $1,385,052 $1,381,608
Note: Maturity information related to mortgage-backed securities included
above is presented based upon weighted average maturities anticipating future
prepayments.
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<PAGE>
Note 3. Loans
The following table summarizes the composition of the loan portfolio, net of
unearned interest, as of March 31, 1996 and December 31, 1995. (Dollars are in
thousands)
March 31, December 31,
1996 1995
Commercial loans: --------- ---------
Corporate loans $1,785,162 $1,697,350
Asset-based lending 222,758 220,346
Commercial leasing 245,359 240,699
Industrial revenue bonds 30,592 34,482
Total commercial loans 2,283,871 2,192,877
Real estate loans:
Residential mortgage 1,249,588 1,243,718
Commercial mortgage 1,084,066 1,082,001
Construction and land development 258,930 250,467
Total real estate loans 2,592,584 2,576,186
Retail loans:
Installment 1,421,206 1,400,362
Credit cards 339,691 338,138
Retail leasing 468,730 418,218
Total retail loans 2,229,627 2,156,718
Total loans, net of unearned interest $7,106,082 $6,925,781
Note 4. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses is shown in the
following table. (Dollars are in thousands)
Three Months Ended Year Ended
March 31, December 31,
1996 1995 1995
------- ------ --------
Balance - beginning of period $106,909 $95,979 $ 95,979
Loans charged-off (9,508) (6,273) (28,248)
Recoveries on loans previously charged-off 3,192 4,363 14,077
Net charge-offs (6,316) (1,910) (14,171)
Provision charged to earnings 8,823 5,229 25,101
Balance - end of period $109,416 $99,298 $106,909
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Note 5. Impaired Loans
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 (as
amended by SFAS No. 118) at March 31, 1996. (Dollars are in thousands)
March 31, 1996 December 31, 1995
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired Loans: --------- -------- --------- --------
Valuation allowance required $ 12,687 $2,564 $15,688 $3,922
No valuation allowance required 19,304 -- 14,171 --
Total impaired loans $ 31,991 $2,564 $29,859 $3,922
The average recorded investment in impaired loans for the three months
ended March 31, 1996 was $31 million, compared to $29 million for the same
period in 1995. As a general policy, the Corporation applies both principal
and interest payments received on impaired loans as a reduction of principal.
No interest income was recognized on impaired loans for the first quarter of
1996 or 1995.
Note 6. Income Tax
The components of the net deferred tax liability included in the Corporation's
consolidated balance sheets at March 31, 1996 and December 31, 1995 are shown
in the following table. (Dollars are in thousands)
March 31, December 31,
1996 1995
Allowance for loan losses $ 38,443 $ 37,567
Deferred compensation 3,077 2,522
Deferred loan fees 1,531 1,749
Unrealized loss on securities 1,205 --
Intangible asset amortization 1,226 845
Other 3,021 3,011
Total deferred tax asset 48,503 45,694
Leased assets (60,372) (55,343)
Fixed asset depreciation (5,379) (5,379)
Pension liabilities (5,083) (4,945)
Unrealized gain on securities -- (3,208)
Purchase accounting/intangible assets (587) (580)
Other (2,985) (2,818)
Total deferred tax liability (74,406) (72,273)
Net deferred tax asset/(liability) $ (25,903) $ (26,579)
The Corporation has not recorded a valuation reserve related to deferred tax
assets.
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<PAGE>
Note 7. Noninterest Income and Other Noninterest Expense
The following are included in other service charges and fees, and all other
income for the three months ended March 31, 1996 and 1995. (Dollars are in
thousands)
March 31,
1996 1995
------ ------
Credit card fees $ 3,927 $ 3,286
ATM fees 2,062 1,656
Mortgage banking income 1,831 940
The following are included in all other expense for the three months ended
March 31, 1996 and 1995.
March 31,
1996 1995
------ ------
Amortization of intangible assets $ 4,117 $ 2,977
Outside processing services 2,655 2,634
State taxes 2,634 2,240
Marketing 2,373 1,931
FDIC insurance 856 3,929
Note 8. Mortgage Servicing Rights
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65." SFAS No. 122 now requires the
Corporation to capitalize mortgage servicing rights on originated mortgage
loans when the loans are sold or securitized and servicing is retained. When a
mortgage loan is purchased or originated to be sold or securitized with
servicing retained, the total cost of the loan is allocated to the mortgage
servicing right and the loan based on their relative fair values. Under SFAS
No. 122, capitalized servicing rights should be assessed for impairment based
on the fair value of those rights. In addition, capitalized mortgage servicing
rights should be stratified based on one or more predominant risk
characteristics of the underlying loans and impairment should be recognized
through a valuation allowance for each impaired stratum.
The value of pre-SFAS No. 122 purchased mortgage servicing rights (PMSRs)
was established using the amount of consideration paid, which is based on
current market conditions at the time the loan was purchased. Beginning in
1996, the value of servicing rights is established based on the amount of
consideration paid for loans purchased or pricing determined using a valuation
model which calculates the present value of estimated future cash flows based
on the market rate at the time of the loan for originated loans. Mortgage
servicing rights are amortized as noninterest expense over the period in
proportion with estimated net servicing income.
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<PAGE>
For the purposes of impairment evaluation and measurement, mortgage servicing
rights capitalized in 1996 are stratified based on fixed and variable rate
products by 200 basis point rate bands, while pre-SFAS No. 122 PMSRs are
measured separately. Quarterly impairment testing is performed using a
discounted cash flow methodology assuming current national prepayment speeds
and an 8.0 percent discount rate. Impairment will be recognized through a
valuation allowance for each impaired stratum.
The following is a summary of mortgage servicing rights at March 31, 1996.
(Dollars are in thousands)
Mortgage Servicing Rights Amount
Balance at December 31, 1995 $ 6,819
Amount capitalized 1,404
Amortization (268)
Valuation allowance --
Balance at March 31, 1996 $ 7,955
Fair Value at March 31, 1996 $ 8,743
There was no valuation allowance established related to mortgage servicing
rights at March 31, 1996.
Note 9. Subsequent Event
On April 10, 1996, Star Bank, N.A. ("the Bank"), the lead bank of the
Corporation, signed a definitive agreement to acquire four Connersville,
Indiana branch offices from National City Bank, Indiana. This transaction will
be accounted for as a purchase, and accordingly, the assets acquired and
liabilities assumed will be recorded at estimated fair value. In purchasing
these branch offices, the Bank will acquire approximately $25 million in loans
and $60 million in deposits for a premium of approximately $5 million. This
transaction is expected to be consummated in July, 1996.
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<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Net income of Star Banc Corporation ("the Corporation") for the quarter ended
March 31, 1996, was $38,128,000, a 16.4 percent increase over the first
quarter of 1995. Primary and fully diluted earnings per share were $1.28 for
the first quarter of 1996, compared to $1.09 for the first quarter of 1995.
This represents an increase of 17.4 percent for both primary and fully diluted
earnings per share.
Earnings results for the first quarter of 1996 reflect increases in net
interest income and noninterest income. Included in the first quarter of 1995
was a $1.3 million gain on sale of $375 million in available-for-sale
securities. Excluding the gain on sale of securities, net income would have
increased 19.4 percent in the first quarter of 1996, compared to 1995. Also,
fully diluted earnings per share would have increased 20.8 percent, excluding
the gain in 1995.
Return on average assets was 1.60 percent for the first quarter of 1996,
compared to 1.42 percent for the same period in 1995. Return on average equity
increased to 18.74 percent for the first quarter of 1995 compared to 17.81
percent in 1995.
On April 10, 1996, Star Bank, N.A. ("the Bank"), the lead bank of the
Corporation, signed a definitive agreement to acquire four Connersville,
Indiana branch offices from National City Bank, Indiana. This transaction will
be accounted for as a purchase, and accordingly, the assets acquired and
liabilities assumed will be recorded at estimated fair value. In purchasing
these branch offices, the Bank will acquire approximately $25 million in loans
and $60 million in deposits for a premium of approximately $5 million. This
transaction is expected to be consummated in July, 1996.
FINANCIAL CONDITION
Total assets at March 31, 1996 amounted to $9.61 billion up slightly from $9.57
billion at December 31, 1995. Total loans, net of unearned interest, increased
to $7.11 billion at March 31, 1996, compared to $6.93 billion at December 31,
1995. The Corporation has experienced increases in loan volumes for most
lending areas for the first three months of 1996, led by commercial loans up,
$91 million or 4.2 percent, and retail loans up $73 million or 3.4 percent.
Investment securities declined $98 million to $1.60 billion at March 31,
1996, compared to $1.70 billion at December 31, 1995. This decrease was due to
scheduled maturities and paydowns on mortgage-backed securities. As of March
31, 1996, the Corporation's investment securities portfolio included $1.42
billion in securities classified as available-for-sale, a decline of $96
million from December 31, 1995, and $183 million classified as
held-to-maturity. At March 31, 1996 the Corporation reported a net unrealized
loss of $3.4 million on available-for-sale securities, with an offsetting
decrease to shareholders' equity of $2.2 million (net of tax). For the first
three months of 1996, the after-tax net unrealized gain/(loss) reported as a
separate component of equity changed from an unrealized gain of $6.0 million to
an unrealized loss of $2.2 million, decreasing equity $8.2 million.
-15-
<PAGE>
Deposits declined $41 million to $7.65 billion at March 31, 1996 from $7.69
billion at December 31, 1995. This decline was due primarily to a $34 million
decrease in certificates of deposit and eurodollar deposits of $100,000 and
over. As a result of declines in deposit rates over the last year, the
Corporation has seen a continued shift in customer deposits from CDs, savings
and NOW accounts into tiered rate money market accounts. For the first three
months of 1996, money market deposit accounts increased $56 million, while
small CDs and savings and NOW accounts decreased $47 million and $9 million,
respectively. Noninterest-bearing deposits also declined slightly in the first
quarter primarily as a result of seasonal factors. Due to the traditional
increase in level of business activity during the fourth quarter of each year,
demand deposits increase significantly. This seasonal buildup in demand
deposits results in increases in cash and due from banks, and money market
instruments. As business activity slows following the holiday season, demand
deposits, money market instruments and cash and due from banks decline.
RESULTS OF OPERATIONS
Net interest income, the Corporation's principal source of earnings, increased
$7.6 million or 8.4 percent in the first quarter of 1996, compared to the same
period in 1995. The increase in 1996 was due to a change in the mix of earning
assets, as loan growth has been funded from sales, maturities and principal pay
downs in the investment portfolio. In addition, deposit growth from the
Household branch acquisition in the third quarter of 1995 was used to pay down
higher cost borrowed funds, therefore, reducing the cost of funding sources.
Average loans were up $656 million or 10.4 percent, while investment securities
declined $569 million or 25.5 percent in the first quarter of 1996, compared to
the same period in 1995.
Net interest margin increased 31 basis points to 4.58 percent in the first
three months of 1996, compared to 4.27 percent for the same period in 1995.
This increase was the result of a 24 basis point increase in yields on earning
assets, primarily as a result of the change in mix of earning assets described
above, in addition to a 7 basis point decline in the cost of supporting funds,
also described above. Table 1 provides detailed information as to the average
balances, interest income/expense and rates earned or paid by major balance
sheet category.
Net interest income after provision for loan losses was impacted by an
increase in the provision for loan losses of $3.6 million in the first quarter
of 1996, compared to 1995. As discussed further in the Asset Quality section,
the provision has trended upward over the last twelve months due to the
increases in loans outstanding and change in loan mix toward consumer loans. In
addition, recoveries were lower in the first three months of 1996, compared to
the prior year.
Noninterest income continues to be a growing source of revenue, representing
28.6 percent of the Corporations tax-equivalent net revenues in the first three
months of 1996, compared to 26.6 percent in the same period in 1995.
Noninterest income was $39.8 million for the first three months of 1996, an
increase of $6.6 million or 19.9 percent, from the $33.2 million reported for
the same period of 1995. Excluding the $1.3 million gain on sale of securities
in the first quarter of 1995, noninterest income increased $7.9 million or 24.7
percent in 1996, compared to the same period in 1995. Contributing to the
improvement in noninterest income was a $2.7 million increase in service
charges on deposits, due in part to the Household acquisition, and a $1.4
million increase in trust fees, as compared to the prior year. In addition,
international, ATM and credit card fees increased 28.9 percent, 24.5 percent
and 19.5 percent, respectively in the first quarter of 1996.
-16-
<PAGE>
Effective January 1, 1996 the Corporation adopted Statement of Financial
Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65." SFAS No. 122 now requires a
mortgage banking enterprise to capitalize mortgage servicing rights on
originated mortgage loans, when the underlying loans are sold or securitized
and the servicing is retained. The adoption of SFAS No. 122 resulted in
approximately $800,000 in additional mortgage banking income for the first
three months of 1996.
Noninterest expense totaled $72.1 million in the first quarter of 1996, a 3.6
percent increase from $69.6 million for the same period of 1995. The increase
in noninterest expenses in 1996 was due primarily to the Household acquisition.
Increases related to Household include salaries, occupancy, equipment,
supplies and amortization of intangibles. Somewhat offsetting these increases
was a $3.1 million decrease in FDIC insurance due to the recent reductions in
premium rates. However, federal legislation is pending that would assess banks
a one-time insurance premium on deposits insured by the Savings Association
Insurance Fund (SAIF). If this legislation passes, the Corporation's
assessment could range from $6 million to $11 million (pre-tax). The
Corporation's noninterest expense ratio declined sharply for the first quarter
of 1996 to 51.9 percent, compared to 55.8 percent for the same period of 1995.
Compared to the first quarter of 1995 net revenue increased 11.4 percent, while
noninterest expenses were up only 3.6 percent.
The Corporation's effective tax rate for the three months ended March 31,
1996 and 1995 amounted to 33.4 percent.
-17-
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
First Quarter, 1996 First Quarter, 1995
Daily Average Daily Average
Average Interest Rate Average Interest Rate
--------- -------- ------ --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans.....................$2,228,950 $ 48,239 8.70 % $2,085,415 $ 47,734 9.27 %
Real estate loans.................... 2,565,329 54,030 8.43 2,404,714 48,997 8.16
Retail loans......................... 2,191,901 50,345 9.22 1,839,998 39,674 8.70
Total loans..................... 6,986,180 152,614 8.76 6,330,127 136,405 8.69
Taxable investment securities........ 1,613,371 25,586 6.34 2,211,196 34,948 6.32
Non-taxable investment securities.... 48,542 1,097 9.07 19,236 302 6.29
Federal funds sold and securities
purchased under agreements to
resell............................. 15,269 221 5.82 22,236 355 6.47
Interest-bearing deposits in banks... 100 1 5.02 100 1 4.48
Total interest-earning assets... 8,663,462 $ 179,519 8.31 % 8,582,895 $ 172,011 8.07 %
Cash and due from banks.............. 482,329 391,161
Allowance for loan losses............ (109,119) (99,053)
Other assets......................... 562,363 498,730
Total assets....................$9,599,035 $9,373,733
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW......................$1,994,905 $ 10,942 2.21 % $1,975,471 $ 10,814 2.22 %
Money market deposit accounts........ 957,647 9,262 3.89 663,410 5,374 3.29
Time deposits $100,000 and over...... 436,966 6,072 5.59 592,983 8,449 5.78
Time deposits under $100,000......... 2,935,550 40,843 5.60 2,899,355 38,100 5.33
Short-term borrowings................ 845,880 10,434 4.96 1,120,281 15,164 5.49
Long-term debt....................... 161,220 2,759 6.85 166,491 2,542 6.19
Total interest-bearing
liabilities................... 7,332,168 $ 80,312 4.40 % 7,417,991 $ 80,443 4.40 %
Noninterest-bearing deposits......... 1,299,117 1,097,297
Other liabilities.................... 149,581 112,530
Shareholders' equity................. 818,169 745,915
Total liabilities and
shareholders' equity..........$9,599,035 $9,373,733
Net interest margin.................. 4.58 % 4.27 %
Interest rate spread................. 3.91 3.67
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing a marginal federal income tax rate of 35 percent for 1996 and 1995.
The total of nonaccruing loans is included in average amount outstanding.
</TABLE>
-18-
<PAGE>
ASSET QUALITY
As of March 31, 1996, the allowance for loan losses was $109.4 million or 1.54
percent of loans, net of unearned interest. This compares to an allowance of
$106.9 million or 1.54 percent of loans, net of unearned interest, at December
31, 1995. The allowance as a percentage of nonperforming loans declined
slightly to 286 percent at March 31, 1996 compared to 289 percent at December
31, 1995 and 296 percent at March 31, 1995.
Table 2 provides a summary of activity in the allowance for loan losses
account by type of loan. As shown in that table, net charge-offs totaled $6.3
million in the first quarter of 1996, a $4.4 million increase over the first
quarter of 1995. Annualized net charge-offs as a percentage of average
outstanding loans increased also to 0.36 percent for the first quarter of 1996,
compared to 0.12 percent for the same period in 1995.
The amount of net charge-offs and percentage of charge-offs to average loans
were at historically low levels in the first quarter of 1995 and have trended
upward over the last twelve months primarily in the retail and commercial loan
areas. This increase is a result of higher levels of loans outstanding and a
change in loan mix toward consumer loans. Net charge-offs for retail loans
increased $2.8 million in the first quarter of 1996, compared to the prior
year, as net charge-offs on credit cards increased $1.6 million in 1996 due to
higher loan volumes and an increase in customer base. In addition, net
charge-offs on commercial loans were $2.3 million in the first quarter of 1996,
compared to $223,000 for the same period in 1995. This was due in part to a
large recovery received in 1995. These results continue to reflect the
Corporation's commitment to maintaining strict credit standards.
As shown in Tables 2 and 3, nonperforming assets levels increased $4.9
million to $40.8 million at March 31, 1996, compared to $35.9 million at March
31, 1995. Nonperforming assets were up slightly in the first quarter of 1996.
Although nonperforming assets and nonperforming loans have increased, they have
not increased as rapidly as net charge-offs since most retail loans are
charged-off before becoming classified as a nonperforming loan. The percentage
of nonperforming loans to end-of-period loans increased slightly to 0.54
percent, compared to 0.52 at March 31, 1996 and relatively flat with December
31, 1995. Loans past-due 90 days or more and still accruing interest increased
$2.0 million in the first three months of 1996, and $3.2 million compared to
March 31, 1995. These increases occurred within the commercial loan and retail
loan portfolios.
The specific valuation allowance recorded on impaired loans, as prescribed
by Statement of Financial Accounting Standards No. 114 (as amended by SFAS No.
118), is included in the total allowance for loan losses. In addition to the
valuation allowance on impaired loans, the adequacy of the total allowance for
loan losses is monitored on a continual basis and is based on management's
evaluation of several key factors: the quality of the current loan portfolio,
current economic conditions, evaluation of significant problem loans, an
analysis of periodic internal loan reviews, delinquency trends and ratios,
changes in the mix and levels of various loan types, historical charge-off and
recovery experience and other pertinent information. These estimates are
reviewed continually and, as adjustments become necessary, they are reported in
earnings in the period in which they become known. It is management's opinion
that the allowance for loan losses at March 31, 1996 was adequate to absorb all
anticipated losses in the loan portfolio as of that date.
The recorded investment in impaired loans at March 31, 1996 was $32.0
million with a related valuation allowance calculated under SFAS No. 114 of
$2.6 million.
-19-
<PAGE>
TABLE 2 SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
First Quarter
1996 1995
--------- ----------
Average loans - net of unearned
interest........................... $ 6,986,180 $ 6,330,127
Allowance for loan losses:
Balance - beginning of period...... $ 106,909 $ 95,979
Charge-offs:
Commercial....................... (3,527) (2,257)
Real estate...................... (278) (1,077)
Retail........................... (5,703) (2,939)
Total charge-offs.............. (9,508) (6,273)
Recoveries:
Commercial....................... 1,181 2,034
Real estate...................... 149 437
Retail........................... 1,862 1,892
Total recoveries............... 3,192 4,363
Net charge-offs.............. (6,316) (1,910)
Provision charged to earnings...... 8,823 5,229
Balance - end of period............ $ 109,416 $ 99,298
Ratio of net charge-offs to average
loans - net of unearned interest... 0.36% 0.12%
-20-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3 NONPERFORMING ASSETS
(Dollars in thousands)
March 31, December 31, March 31,
1996 1995 1995
--------- ---------- -----------
<S> <C> <C> <C>
Loans on nonaccrual status..... $ 38,212 $ 36,875 $ 33,519
Loans which have been
renegotiated................. 86 87 35
Total nonperforming loans.... 38,298 36,962 33,554
Other real estate owned........ 2,479 3,006 2,317
Total nonperforming assets... $ 40,777 $ 39,968 $ 35,871
Percentage of nonperforming
loans to loans* ............. 0.54% 0.53% 0.52%
Percentage of nonperforming
assets to loans* and other
real estate owned............ 0.57% 0.58% 0.56%
Loans past due 90 days
or more...................... $ 9,711 $ 7,750 $ 6,489
* Net of unearned interest.
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
----------------March 31, 1996---------------- --------------December 31, 1995---------------
---------Nonperforming Loans--------- 90 Days ---------Nonperforming Loans--------- 90 Days
or or
Non- Restruc- Percentage More Non- Restruc- Percentage More
accrual tured Total of Loans Past-Due accrual tured Total of Loans Past-Due
------ ------ ----- ------- -------- ------ ------ ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial:
Corporate.................. $24,537 $86 $24,623 1.36% $1,925 $23,371 $87 $23,458 1.35% $958
Asset-based lending........ 1,569 -- 1,569 0.70 -- -- -- -- -- --
Commercial leasing......... 192 -- 192 0.08 -- 216 -- 216 0.09 --
Total commercial loans... 26,298 86 26,384 1.16 1,925 23,587 87 23,674 1.08 958
Real estate loans:
Residential................ 4,223 -- 4,223 0.34 2,566 5,618 -- 5,618 0.45 2,589
Commercial mortgage........ 5,144 -- 5,144 0.47 1,423 5,722 -- 5,722 0.53 949
Construction/land
development.............. 99 -- 99 0.04 364 99 -- 99 0.04 433
Total real estate loans.. 9,466 -- 9,466 0.37 4,353 11,439 -- 11,439 0.44 3,971
Retail loans:
Installment................ 1,378 -- 1,378 0.10 542 978 -- 978 0.07 962
Credit cards............... 823 -- 823 0.24 2,803 743 -- 743 0.22 1,822
Retail leasing............. 247 -- 247 0.05 88 128 -- 128 0.03 37
Total retail loans....... 2,448 -- 2,448 0.11 3,433 1,849 -- 1,849 0.09 2,821
Total loans.............. $38,212 $86 $38,298 0.54 % $9,711 $36,875 $87 $36,962 0.53 % $7,750
</TABLE>
-22-
<PAGE>
LIQUIDITY, CAPITAL RESOURCES and CASH FLOWS
To ensure that adequate funds are always available to meet unexpected customer
demands for funds, such as high levels of deposit withdrawals or loan demand,
or other aspects of the banking business, the Corporation has succeeded in
developing and maintaining a large stable base of core funding from customers
based in its local market areas. By policy, the Corporation limits the amount
each banking subsidiary can borrow, subject to the Corporation's ability to
borrow funds in the capital markets in an efficient and cost effective manner.
The Corporation's lead bank, Star Bank N.A. (the Bank), is a member of the
Federal Home Loan Bank of Cincinnati, and in 1995 began issuing national
market retail certificates of deposits, however, there were no such CDs
outstanding at March 31, 1996. In 1994, the Bank prepared an offering
circular in order to issue bank notes of up to $500 million with terms that can
vary from 30 days to 30 years. Currently, the Bank has not issued any notes
under this offering circular. In addition to these funding alternatives, the
Corporation maintains a presence in the national fed funds, repurchase
agreement, certificate of deposit and Eurodollar markets.
In the third quarter of 1995, the Corporation prepared a private placement
memorandum in order to issue commercial paper notes up to a maximum aggregate
amount of $100 million, with maturities of up to 270 days. The proceeds of
the notes from the commercial paper program are used for general corporate
purposes and to provide funding to Star Banc Finance, Inc. There is currently
$77 million in commercial paper outstanding at March 31, 1996. The
Corporation's consolidated long-term debt, which includes senior and
promissory notes, remained at $161 million for the first three months of 1995.
In 1994, the board of directors of the Corporation approved a common stock
buyback program to purchase up to one million shares of common stock over the
next three years. In January of 1996, the board of directors approved the
purchase of an additional two million shares under the buyback program over the
next three years. The repurchased shares are held as treasury shares for
reissue in connection with conversion of preferred shares, employee stock
options and other corporate purposes. Through March 31, 1996, the Corporation
has repurchased a total of 1,289,000 shares under the buyback program, of which
465,000 had not yet been reissued.
Total shareholders' equity decreased $5 million in the first three months to
$816 million at March 31, 1996. This decrease was the result of a $8.2 million
decline in the unrealized gain/(loss) on available-for- sale securities, in
addition to a $20 million increase in treasury stock related to buyback
activity, in the first three months of 1996. The Corporation also raised its
quarterly dividend rate per common share from $0.40 in 1995 to $0.47 in 1996, a
17.5 percent increase.
Banking industry regulators define minimum capital requirements for banks
and bank holding companies. The Corporation's tier 1 and total risk-based
capital ratios at March 31, 1996 were 7.82 percent and 11.03 percent,
respectively, well above the minimum requirements of 4.0 percent for tier 1
capital to risk-weighted assets and 8.0 percent for total capital to
risk-weighted assets. These compare to tier 1 and total ratios of 7.97 percent
and 11.23 percent at December 31, 1995. Regulatory authorities have also
established a minimum adjusted equity-to-average quarterly assets ("leverage")
ratio of 3.00 percent. As of March 31, 1996 the Corporation's leverage ratio
was 6.36 percent compared to 6.23 percent at December 31, 1995. The slight
decreases in the Corporation's tier 1 and total capital ratios in the first
quarter of 1996 were due to an increase in risk-weighted assets in addition to
high volume of buyback activity which resulted in a slight decline in tier 1
equity.
-23-
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1. through 5. are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule
(B) No Current Reports on Form 8-K were filed by the Corporation
in the first quarter of 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR BANC CORPORATION
May 15, 1996 /s/ Jerry A. Grundhofer
------------- ------------------------
Date Jerry A. Grundhofer
Chairman, President, and Chief
Executive Officer
May 15, 1996 /s/ David M. Moffett
------------- ------------------------
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
-24-
<PAGE>
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands except per share data)
First Quarter
1996 1995
-------- --------
Net income........................ $ 38,128 $ 32,766
Preferred dividends............... 5 37
Income available to common
shareholders.................... $ 38,123 $ 32,729
Weighted average of common
stock equivalents................. 29,803 29,988
Weighted average of preferred
stock convertable to common
stock equivalents................ 15 129
Weighted average of fully
diluted common stock equivalents.. 29,818 30,117
Primary earnings per share
(income available to common
shareholders divided by weighted
average of common stock
equivalents)..................... $ 1.28 $ 1.09
Fully diluted earnings per share
(net income divided by weighted
average of fully diluted
common stock equivalents)........ $ 1.28 $ 1.09
Note: The effect of stock options outstanding are not dilutive to earnings
per share as defined in APB 15 and therefore are not included with
the above calculations.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 428,302
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 11,990
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,421,972
<INVESTMENTS-CARRYING> 182,771
<INVESTMENTS-MARKET> 182,956
<LOANS> 7,106,082
<ALLOWANCE> 109,416
<TOTAL-ASSETS> 9,609,505
<DEPOSITS> 7,653,095
<SHORT-TERM> 818,601
<LIABILITIES-OTHER> 160,993
<LONG-TERM> 161,239
0
281
<COMMON> 150,802
<OTHER-SE> 664,494
<TOTAL-LIABILITIES-AND-EQUITY> 9,609,505
<INTEREST-LOAN> 152,157
<INTEREST-INVEST> 26,306
<INTEREST-OTHER> 222
<INTEREST-TOTAL> 178,685
<INTEREST-DEPOSIT> 67,119
<INTEREST-EXPENSE> 80,312
<INTEREST-INCOME-NET> 98,373
<LOAN-LOSSES> 8,823
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 72,090
<INCOME-PRETAX> 57,251
<INCOME-PRE-EXTRAORDINARY> 57,251
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,128
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 8.31
<LOANS-NON> 38,212
<LOANS-PAST> 9,711
<LOANS-TROUBLED> 86
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 106,909
<CHARGE-OFFS> 9,508
<RECOVERIES> 3,192
<ALLOWANCE-CLOSE> 109,416
<ALLOWANCE-DOMESTIC> 109,416
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
